Iron ore dips as analysts temper bearish forecasts

The iron ore price has inched lower for the second day in a row, even as another investment bank upgrades its forecast.

Remote-controlled stackers and reclaimers move iron ore to rail cars at Rio Tinto's Port Dampier operations in Western Australia's Pilbara region. (AFP PHOTO/AMY COOPES)

The iron ore price has edged down for the second day in a row, even as another investment bank upgraded its assumptions after the commodity has remained stubbornly resilient this year.

Iron ore fell 0.4 per cent to $US56.20 overnight, according to The Steel Index, from $US56.40 the previous day.

Most analysts expect the commodity to continue declining from current levels, but its surprising strength over recent months has prompted a number of revisions to more bearish forecasts.

Analysts at Morgan Stanley have upgraded their iron ore forecasts by 11 per cent for 2016 and 27 per cent for 2017, the bank said in a research note.

The upgrade is a positive for mining giant BHP Billiton, one of the bank’s preferred mining stocks.

“Although we still expect iron ore prices to reach a low in the December quarter of 2016, we view fiscal 2016 as the trough year for free cashflow,” Morgan Stanley said.

The bank has lifted its net profit expectations, saying a previous estimate was low due to an “aggressively low iron ore price forecast”, increased its price target and reaffirmed its overweight rating on the company.

“On current prices [$21.50], our new price target [$27.50] offers the second most upside in our coverage universe,” Morgan Stanley said. “The company has the capacity to raise dividends, options to reinvest and the benefit of a slightly more diversified commodity mix.

“Ongoing unit cost reduction and a suite of quality assets remain fundamental drivers of our positive view.”

Meanwhile, the less bearish iron ore assumptions are also a positive for rival Rio Tinto, Morgan Stanley said, reaffirming an overweight rating and lifting its price target.

“There are some specific issues that warrant attention, but we remain positive on the equity,” the bank said.

In London trade, BHP shares fell 1.5 per cent, while Rio Tinto lost 1 per cent.